THIS COLUMN continues the discussion[1]� of the issues relating to a contribution of property to a partnership where the tax basis to the contributing partner is more or less than the property’s value. We will examine the basic principles of the regulations adopted under �704(c)(1).[2]�
Regulatory Implementation of �704(c) Allocations. Regulation �1.704-3 (Final 704(c) Regulations) addresses the general principle that partnership allocations must take into account the variation between the partnership’s adjusted tax basis in the contributed property and the fair market value (FMV) of that property at the time of contribution. The regulation permits the use of any “reasonable” method of making allocations so that the contributing partner receives the tax burdens and benefits of any precontribution gain (built-in gain) or pre-contribution loss (built-in loss). Where such a variation exists, the partnership is required to make allocations of its income, gain, loss and/or deductions so as to eliminate this variation. Three reasonable methods suggested by the regulation are: (1) the traditional method; (2) the traditional method with curative allocations; and (3) the remedial allocation method.
